Oil prices dropped by more than 15% this year. And gasoline has broken $3 per gallon in some states.

Good news, right? Not if you like having a job…

The country’s economic recovery is strongly tied to the jobs and revenue created by the shale boom. But now the market is flooded with supply, pushing prices down and affecting producers’ bottom lines.

On top of that, OPEC is out for blood.

Saudi Arabia has made it clear that it’s willing to accept much lower prices in order to damage rivals in the United States.

It’s not clear who will win this game of chicken, but someone’s economy is going to suffer.

How Low Can They Go?

If you listened, you’ve probably saved a bundle of cash by already getting out of the oil market – especially shale plays, as they’ve been absolutely hammered over the past few months. Some are down by more than 40%.

Shale plays are popping up left and right. More producers means more competition, and more competition means lower prices.

But this is a case of too much expansion too quickly. Prices are dropping to a point that will make it hard for companies to stay profitable.

On top of that, OPEC is hell-bent on running U.S. oil out of business.

Saudi Arabia fired the first salvo last week when it announced that it would price oil lower. Iran followed suit shortly after.

Officials have said Saudi Arabia is prepared to sell oil as low as $80 for two years in order to curb competition from the United States. So it’s certainly in it for the long haul.

All the while, inventories and production are increasing.

OPEC’s production jumped to 31 million barrels per day in September, up from just over 30 million in August. That’s the most output from OPEC in more than two years!

But this is a dangerous game that leaves both the United States and OPEC’s economies vulnerable to a slump.

Sacrificing the Pawns

In the United States, the biggest number of jobs created since the Great Recession has come from the energy patch.

We would definitely not have emerged as quickly as we did were it not for the massive shale oil and gas boom the country just experienced.

The research group IHS estimates that five million jobs directly related to the energy boom will be created by 2025.

Add to this the number of companies in the energy sector that would go out of business overnight, and you’re looking at a major uptick in the unemployment rate.

OPEC members are in danger because their economies rely so heavily on oil.

These countries are often viewed as super low-cost producers that can enjoy the fruits of their bountiful black gold at any price.

While it’s true that they are the lowest-cost producers – some reports have Saudi Arabia producing oil for around $30 per barrel – it’s the selling price of oil that’s important.

Most OPEC members are wholly reliant on the proceeds of oil sales to make ends meet and keep their countries functioning.

Venezuela requires oil prices to be above $121 per barrel. Iran needs oil to be trading at more than $120 per barrel. Saudi Arabia needs to be above $93 per barrel. Countries like Qatar and Kuwait can make do with prices in the $60s.

With the situations on both sides of the Atlantic, many could make the case for a total collapse in oil prices (some might predict $20 per barrel).

But that’s an unlikely scenario.

Prices may correct, but there’s too much riding on the price of oil for the players to allow it to completely collapse.

Who Will Come Out on Top?

The price bottom should occur between $70 and $85 per barrel.

While the charts show significant support at $70, we can count on a few good reasons why the price will never get there.

It’s more likely that prices would drop slowly over the next few years. But before that happens, the U.S. government would step in and loosen export restrictions.

OPEC members stand to be the biggest losers, as their economies – unlike those of industrialized countries – are completely dependent on the very same resource they’re trying to push lower.

Eventually OPEC, despite its proclivity to produce more oil than necessary, would have no choice but to cut back production for the greater good of its membership.

Comments (5)

Saudi price cuts are aimed to hurt their enemies – ISIS and Iran. The sacrifice backed by USA is also to curb Russian profits. Normally at $80 they cut production to boost prices. But not this time! The squeeze is on ISIS to limit their arms buying power.

What would happen if all of the sudden Saudis are out of the picture.
Apparatus:
One: Uprising in Shia’s area of Saudi Arabia which creates more than 80 percent of Saudi oil. The area which is in south of Saudi Arabia is know for a lot of unrests.
Two: U.S. and Iran coalition towards the support of uprising.
Triggering: ISIS advancements inside Iraq and beyond, later on starting the blaming game on Saudis.
When oil company’s interests are threatened, they sell their own mothers to be on top again.
The game has started but the players had hard time to participate. Search on line you find more answers.

I remember that on one of the previous oil crisis, shale oil exploration was begun in the US in part because oil prices were very high, but as soon as the US put its house in order and oil prices began to fall, they reached a level where fracking became unprofitable and all shale oil extraction was abandoned.
Can this happen again?
On the previous ocasion Arab producers could keep on pumping even with prices low, because their costs were lower and their government’s expenditures were more modest. You mention that their break-even costs are very high now, but isn’t that the consequences of wanting to impress themselves first and others afterwards that they have a highly rich country?
They will have to lower their expectations and wait for production to drop again so that it levels with demand and then they will be alright. They can do this, because they have low populations and lower still need for oil or gas and absolute rulers.
Any way you consider it, the us will have to keep on looking for lower consumption and different sources of energy. Anything else is temporary.

The Saudi’s are playing a very dangerous game. If oil export regulations in the US are loosened or abolished, this will be a whole new ball game! The main losers will be Saudi Arabia, Iran, and the extinction of Venezuela. Russia will definitely suffer if the oil price drops to $80/barrel. Hold on to your hats, folks.

Donald Trump ran a campaign on hyperbole and vagueness. Now as he prepares to take office, we take a closer look at his contradictory statements on science to make sense of the future of our favored industries.

It’s easy to dismiss celebrities and politicians as having hidden agendas. On the other hand, scientists that uncover cold, hard facts, deserve our respect for their endeavors. But respect is not worship.